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Cisco CEO John Chambers in Trouble Again After Poor Earnings

Douglas A. McIntyre

John Chambers has been the dean of Silicon Valley CEOs for years, based on the length of his time in his position, which goes back to 1995. Many of the most successful tech companies were not founded then. Chambers has only had one major brush with investor wrath that was great enough to potentially unseat him. In 2011, earnings at Cisco Systems Inc. (CSCO) faltered badly as Chamber's M&A machine failed him. Cisco had diversified too far away from its core businesses and into set-top boxes, Wi-Fi and video conferencing. Although it cost thousands of Cisco workers their jobs, Chambers steadied earnings. However, Cisco's numbers have dived gain. His nearly 20 years as CEO ought to end as he steps aside for someone more qualified to run the company for the rest of the decade.

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The figures for the most recently reported quarter were satisfactory. The forecast for Cisco's future quarters was not. Cisco reported revenue of $12.1 billion, up from $11.9 billion in the same period a year ago. Net income was $2.0 billion, against $2.1 billion. However, as MarketWatch reported:

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Second-quarter revenue may drop 8% to 10% compared to the same period of fiscal 2013, and adjusted earnings are seen between 45 and 47 cents a share. Analysts had forecast 4% revenue growth in the second quarter.

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Chambers put much of the blame for this on emerging market soft demand. Cisco's stock dropped 11% on the news, which wiped out nearly $15 billion in market cap.

Chambers missed a major turn in the market for his company's products. Routers and switches rely less on hardware and more on software today. Chinese firm Huawei has exploited this change in the industry and has consistently taken market share from Cisco. The entire industry has moved toward using virtualization software that runs on inexpensive servers. Chambers did not move quickly enough in this direction to keep Cisco at the head of the industry. He continues to defend an ancient model because he has been slow to move toward the new one.

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The stock market has acknowledged Cisco's problems for a long time. While the Nasdaq has risen more than 180% during the past five years, Cisco shares are only up 55%. Based on the sell-off of shares after earnings and on concerns about the company's future, it is difficult to believe that the stock will do any better in the foreseeable future.

The hole Chambers has created at the core of Cisco's product line is large enough that, even if the company scrambles, the cutting edge of its industry has moved too far ahead of it.

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